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Cash Flow Statements Chapter Notes | Accountancy Class 12 - Commerce PDF Download

Cash Flow Statement

As per the chapter of Accountancy on Cash Flow Statement class 12, a cash flow statement refers to a statement showing the cash inflows and outflows or the financial position of a business during different intervals of time in terms of cash and cash equivalents.

  • All publicly listed entities have to prepare and report a cash flow statement along with other financial statements on an annual basis under the New Accounting Standard-3.

Cash vs Cash Equivalent

According to the chapter on Cash Flow Statement class 12, Cash is divided into two categories which are cash in hand and demand deposits with the bank. On the other hand, cash equivalents are described as short-term highly liquid assets that are readily convertible into known amounts of cash and have a low risk of value change.

Cash Flows

As per the chapter on Cash Flow Statement class 12, cash flows are referred to as the inflows and the outflows of cash and cash equivalent in a business. In other words, it can be explained as the movement in and movement out of cash and cash equivalents. Think of it this way, the receipt of cash from a non-cash item would be termed as cash inflow and the cash payment in respect of such items would be termed as cash outflow. 

Objectives of Cash Flow Statement

Based on the chapter on Cash Flow Statement class 12, the following are the objectives of a cash flow statement: 

  • When it comes to short-term financial planning, this method comes in handy.
  • When it comes to successful cash management, this is a must-have.
  • It is useful in the implementation of business policies.
  • Assists in the creation and formulation of a cash budget.
  • Used to measure cash flow from different activities such as running, saving, and funding.

Limitations of the Cash Flow Statement

Based on the chapter on Cash Flow Statement class 12, the following are various limitations of a cash flow statement: 

  • It is based on the historical cost principle
  • Additionally, it is based on secondary data
  • No adherence to basic accounting principles 
  • A cash flow statement is not a substitute for the income statement
  • It ignores all the non-cash transactions

Question for Chapter Notes - Cash Flow Statements
Try yourself:Which of the following is a limitation of the cash flow statement?
View Solution

Classification of Business Activities

 Classification of Business Activities Accounting Standard-3 (Revised) requires that the changes resulting in inflows and outflows of cash and cash equivalents will be classified into following three activities:

(i) Cash flow from operating activities.

(ii) Cash flow from investing activities.

(iii) Cash flow from financing activities.

Cash Flow from Operating Activities

The cash flow from operating activities covers the enterprise’s key revenue-generating activities as well as other non-investment and non-financing activities.
Cash Flow Statements Chapter Notes | Accountancy Class 12 - Commerce

For a Finance Company 


Cash Flow Statements Chapter Notes | Accountancy Class 12 - Commerce

For an Insurance Company 

Cash Flow Statements Chapter Notes | Accountancy Class 12 - Commerce

For a Real Estate or Infrastructure Company 

Cash Flow Statements Chapter Notes | Accountancy Class 12 - Commerce

Question for Chapter Notes - Cash Flow Statements
Try yourself:Which of the following is an example of an operating activity in a cash flow statement?
View Solution

Cash Flow from Investing Activities

Investing activities (as specified by AS-3 or the Accounting Standards-3) are the purchase and disposition of long-term assets and other investments that are not included in cash equivalents. The following is a map of cash flow from investment activities:

Cash Flow Statements Chapter Notes | Accountancy Class 12 - Commerce

Question for Chapter Notes - Cash Flow Statements
Try yourself:Which of the following is an example of an investing activity in a cash flow statement?
View Solution

Cash Flow from Financing Activities

Financing operations, according to AS-3, are those that result in a change in the size and composition of the owner’s capital (including preference share capital) and borrowings (including debentures) from other sources. The following is a chart or table of cash flow generated by financing activities:

Cash Flow Statements Chapter Notes | Accountancy Class 12 - Commerce

Question for Chapter Notes - Cash Flow Statements
Try yourself: 

Which of the following is an example of a financing activity in a cash flow statement?

View Solution

The  Format of Cash Flow Statement

The format of the Indirect Method of the Cash Flow Statement as per the chapter on Cash Flow Statement class 12 and the Accounting Standard-3 (Revised) is as follows: 

Cash Flow Statements Chapter Notes | Accountancy Class 12 - Commerce

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